Tuesday, January 18, 2011

Mahindra Satyam - Recap.

Two years after the scam broke, Satyam is almost back on track. Bhupesh Bhandari tells the story of the turnaround

When Ramalinga Raju confessed his monumental fraud on January 7, 2009, he not only brought Satyam Computer Services, India’s fourth-largest information technology company, perilously close to implosion but also turned topsy-turvy the lives of his 50,000 or so employees. Till that day, being a Satyam employee in Hyderabad, the company’s headquarters, was a matter of pride. Satyam had put the city on the world map. In return, Hyderabad pampered the people of its favourite company — traffic cops let them off for minor violations, marriage proposals seldom got rejected, and banks fell over each other to give loans.

The confession changed everything, almost overnight. Landlords refused to give houses on rent to Satyam employees; they were blacklisted by banks for credit cards and personal loans. As banks froze all credit lines, employees had no option but to settle airline and travel bills with their personal credit cards. When Tech Mahindra formally took over Satyam (it has since been renamed Mahindra Satyam) in mid-2009, it was not just a financial turnaround that needed to be done or an irregularity that had to be set right — the pride of a people had to be restored. On June 20, 2009, Mahindra Satyam CEO C P Gurnani had presented a three-year turnaround plan to the directors. “Midway into it, I am ahead of the milestones I had submitted,” says he.

After losses of Rs 8,174 crore in 2008-09 (because of provisioning of Rs 7,992 crore for Raju’s misdemeanors) and Rs 124 crore in 2009-10, Mahindra Satyam reported a profit of Rs 120 crore in the first six months of 2010-11. Income for the first six months of the current financial year stands at Rs 2,490 crore, which could give an annual income not too different from 2009-10’s Rs 5,481 crore, keeping in mind the appreciation in the rupee. Revenues in the last two quarters have been similar. This indicates the business has stabilised. Customer attrition has stopped; in fact, the company has added 44 new customers. And employees, the company’s top functionaries insist, are no longer an anxious lot. “Floor walks show that the anxiety over stability and security has given way to engagement and innovation,” says Chief Marketing Officer & Chief People Officer T Hari. Adds CFO S Durgashankar: “The stigma of the scam is gone. Banks are more than willing to give loans to our people.”

The first task, of course, was to close the book on the scam. The company was being investigated by Andhra Pradesh’s Crime Investigation Department as well as the Central Bureau of Investigation, Serious Frauds Investigation Office and Enforcement Directorate. Also sniffing around were the Securities & Exchange Board of India, Securities Exchange Commission of the US, the income tax department, registrar of companies and Software Technology Parks of India. All files were in the possession of these agencies. About 100 forensic experts drawn from KPMG and Deloitte would go to these agencies, largely CBI, copy the files during the day and pore over them at night.

All told, 30 terabytes of information was assessed. Kept in hard copies, the information was enough to fill 270,000 file cabinets of 5 ft by 5 ft. Over 2 million emails were reviewed, 300 hard disk drives imaged, and 1 billion lines of transaction data put under the lens. More than 200 bank accounts were analysed and 7,000 consumer contracts reviewed. At the end of the day, 7,500 inflated invoices were found (all such invoices were marked “S”, which helped the experts string them together), which had caused income and profit to be overstated by Rs 6,500 crore. This resulted in over 6,000 reconciliations in bank accounts and over 200,000 adjustments in the books because over 300 different income heads were impacted.

The second challenge was to hold on to customers. When the scam broke out, Satyam had about 650 customers; the tally now stands at around 350, including the 44 new ones. Thus, almost 350 customers have left the company. CTO A S Murty, who served as the interim CEO of the company before Tech Mahindra came on board, discloses that most of these desertions happened within three months of Raju’s confession. The government-appointed directors, to begin with, called up most large customers to say things would be all right soon. The company’s core strength, its delivery capabilities, was intact, they told nervous CTOs. Had it not been for them, the run on Mahindra Satyam could have been worse.

Mahindra Group Vice-Chairman Anand Mahindra and Gurnani took over from where these directors had left off. Between the two, they met all the large customers to convince them to stay with the company. In the first six months, Gurnani met over 150 customers across the globe. Customer meets were organised in London and Chicago to answer their queries. Analyst conferences were held in Hyderabad, London and Boston to apprise them of what the company was doing. This is also when the employees rose to the occasion. Their well-being, reputation and career were at stake. There was a perceptible improvement in service. In November 2009, the company conducted a customers’ delight survey; its score was 4 out of 5. This, claims Hari, was better than the industry average of 3.5-4. More recently, a “consumer as promoter” study was carried out by IMRB; it showed that there were more customers who wanted to be promoters than detractors of Mahindra Satyam.

The other piece was cost-cutting. With inflated income taken out and almost 350 customers walking out, the workforce of 50,000 was too large for Mahindra Satyam. So, when companies moved projects away from Satyam, they were requested to take the teams along. According to Murty, over 80 per cent of the departing customers agreed to this request. About 6,000 people left of their own accord. A separation scheme was also put in place, which was accepted by 9,000 people. As a result, Mahindra Satyam has 24,000 people on its rolls now (27,000 if subsidiaries are included).

But the roll call is still way too long. Manpower shouldn’t account for more than 55 per cent of an efficient software company’s revenues. (Rent, travel and communication adds up to another 15 per cent; the rest is operating profit.) For Mahindra Satyam, it is still 70 per cent. Coupled with rent, travel and communication expenditure of 20 per cent and more, it explains why the company’s EBITDA margin was 8.3 per cent in 2009-10 and 5.7 per cent in the first half of 2010-11. That the company stopped fresh recruitment from campuses didn’t help either — the average salary was higher than peers who pick up freshers in large numbers. It is only in the last six months that Mahindra Satyam has returned to campuses and mopped up 3,000 people. This year could see 4,500 campus recruitments.

The company exited all the nine rented offices in downtown Hyderabad and moved onto its campus in Hitech City. “Several of these contracts were long-term and onerous,” says Durgashankar. All told, Mahindra Satyam vacated 32 offices and saved Rs 184 crore on rent. The axe also fell on lawyers’ fees. “Their bills were crazy,” says Gurnani. “I started capping their fees and linked it to outcomes.” Legal expenses, as a result, have come down from Rs 107 crore in 2009-10 to Rs 16 crore in the first half of 2010-11.

Now that the company’s out of the woods, plans have been set in motion to grow the business. The focus is to mine existing customers for more business and woo back those who had left after the scam. Why? “All our rivals are much bigger in size. For new projects, we won’t even make it to the shortlist,” says Murty. According to Gurnani, only two of the 350-odd customers use all the five services Mahindra Satyam offers (consulting, enterprise business solutions, infrastructure management solutions, integrated engineering services and business platform and operations). “The upside is huge,” he says. The average revenue per salesman is a little less than $4 million; Gurnani wants to ramp it up to $5 million by the end of the year, though it will still be below the industry best practice of $7-8 million. Some headway, Gurnani says, has also been made with customers who had left. An announcement or two could come soon.

The 44 new customers, says Murty, came on board when the company had not restated its accounts for 2008-09 and 2009-10; with the numbers out, getting customers, he feels, will not be so difficult. Mahindra Satyam is also investing in futuristic capabilities like cloud computing, green technologies and open-source tools. It also wants to leverage Tech Mahindra’s expertise in telecommunications and Mahindra & Mahindra’s in engineering and manufacturing.

Still, what is the guarantee that another financial irregularity will not happen? To begin with, the accounting system is being overhauled. During the probe into the scam, it came to light that the company had been using non-integrated accounting practices; as a result, nobody save a select few knew the full picture. The software was so archaic that the developer had nobody left to service it! Engineers who had worked on the software were searched for across the country and brought to Hyderabad to help navigate the maze. It is now being upgraded.

A docket on ethical practices has been given to all employees. They are required to write a test on it; they must score at least 90 per cent to clear it. “The idea is that people should read it carefully,” says Murty. “Every single employee has cleared the test.” A corporate ombudsman has been appointed. Walls between sales and delivery teams have been brought down. “They work in tandem now. We have a two-people-in-the-box approach now,” adds Murty.

Sooner rather than later, Mahindra Satyam will merge with Tech Mahindra. Satyam, the brand, has a limited shelf life. Some people are nostalgic about it and hope the name will survive into the future. “It’s not yet known what the name of the merged entity will be,” says Murty. Of course, there is nothing left in the Satyam offices that could remind a visitor of Raju.

Courtesy: http://www.business-standard.com/india/news/back-frombrink/421805/

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